Could the 11,000-Point Dow Make Us All Miserable?

If a group of predictive theorists are to be believed, the market's about to nosedive — and Americans will get very, very angry... about everything. So is it B.S., or might a national malaise take down Obama?

For decades, stock investors have known that hemlines track stocks — that short skirts mean good times. That's always been my philosophy, for sure. But there's definitely a dark side to ponder: Did you know that bear markets tend to trigger wars? That the size of a war almost always correlates with the size of the bear market that preceded it? That the use of words like "we" and "they" appear to increase as economic trouble approaches? That the popularity of horror movies increase as economic trouble approaches? (Seriously: Check out this report and see how Night of the Living Dead, released at a market peak in 1968, was followed by steady erosion in stocks accompanied by the mood music, as it were, of The Texas Chainsaw Massacre, Halloween, and finally, in 1980, at the grim bottom of the '70s recession, by Friday the 13th).

These statistics come courtesy of the Elliott Wave theorists, a cult of chart obsessives who try to predict the stock market by following trends in social mood — most recently, in an article in The Socionomist (the Elliott Wave newsletter) that follows the current growth of secessionist sentiment — the militias, the tenthers, the birthers, the federal-reserve haters, the fad for nullification of federal laws. A recent Rasmussen poll found the gap between the government and the people as big as the one that preceded the Revolution — just 21 percent of voters now believe that our government rests on the consent of governed, which is a founding principle of our country. To help track all this, the Socionomist article includes the first-ever index of secessionism as it corresponds to dips in the stock market — which is, it turns out, pretty damn close.

The bad news is that the theorists think civil war is a "distinct possibility."

I talked to Alan Hall, the Elliott Waver who wrote the study. Pointing to one of his charts, he showed a downward line that ended in the American Revolution, another leading to the Civil War, another just before World War II, and so on. The disturbingly Spock-like conclusion is that there's little rationality to any of this: We can analyze our misery in terms of our faith or political preferences, but really we are much more like a herd of gazelles or a flock of swallows, tooling happily (or miserably) along in one direction until a few gazelles and swallows start to peel off. Let's head over to that cliff, guys! Last one in is a rotten egg! And suddenly the herd turns.

"We think what is going on is that crowd behavior is not random — it's patterned," Hall said. "And we think we know what the pattern is: waves of optimism and pessimism generate social events."

In other words, the intuitive popular idea that economic conditions generate moods is exactly wrong. "If that was the case," he said, "then stock-market downturns would follow economic downturns, and they don't — every major economic downturn follows the stock-market downturn."

That's why skirts were short in the 1920s: The good mood raised the hemlines. But the mania kept building and building, adding beads and ruffles and silk stockings until America threw that sluttish flapper down on the bed and —

Sorry, my editor blocked that metaphor. Point is, the go-go years of the '90s were a similar phenomenon. "We think there was a major peak in social mood in 2000," Hall said, "and the rally in 2007 was a very strong bear-market rally."

That was followed by the First Dip. Now we're in another rally. The stock market is booming, and retail sales are up. So why don't we feel better?

According to Hall's charts, it's because we're headed for a second dip, as the general slide into pessimism accumulates inertia, which leads to increased feelings of anger, fear, and polarization — and a general "throw the bums out" sentiment. "There's a pretty strong case that bear markets tend to track with incumbents losing their seats," he told me. "Obama rode that mood in, but now that he's in office his popularity has continued to decline."

During the Second Dip, Hall's charts suggest, the pressure of gloom gets so big that violent and secessionist impulses can break out of control. Although this could take years or even decades, he sees one ominous leading indicator: "We've got rising valuation right now in a period of declining psychology — that's a warning sign."

Again, this isn't really because of anything Obama has done. "Mood decline creates the bear market," he says.

People do hate this theory, Hall admits. Nobody wants to think that he's engaged in "pre-rational survival behavior," that he's no smarter than a gnu on the Serengeti, that rumors and movies and hemlines and even politics are just our way of sniffing the wind — that history itself is just a glorified herding pattern. But he insists that the more you study the data, the more obvious it becomes. And there's real personal danger in falling for temporary shifts of mood. "Right now, a lot of people think the government has rescued us and we're working our way out of it," Hall says. "We don't think that's the case. We think the government will ultimately fail because the tremendous positive social mood has generated a huge amount of debt we can't service any more. It's largely dependent on confidence, and confidence is waning."

The whole thing is like a bad romance. "You get into this love affair with stocks and you get your guts ripped out and you're on the floor and you get better and ready to date again and boom, you're in love again — we think that's the mood right now," Hall says. "But our studies suggest we're headed for a major deflation."

That sounds even worse in the context of romance than it does in economics.

So the overt rebels like the Tea Parties are just one symptom among many, Hall and his fellow wavers suggest. Here are some other things to watch for: Our leaders will become less sunny. Our arts will become darker. Even environmentalism is already becoming less popular, which can lead to scary consequences. "A lot of our major accidents like Chernobyl and Exxon Valdez happened during commodity bear markets," he reminded me.

The irony is, despite all the talk of freedom and small governments, all this fear tends to lead to a rise in authoritarianism, which can find ultimate expression in left-wing collectivism just as easily as in right-wing movements. After all, Hall says, "government is the biggest herd."

The real lesson, he said, is this simple: "We definitely have a penchant for trying to control others when we get fearful — we do it under the guise of science and then take it to great extremes. Things that sound great, like we're going to save the planet, turn into nightmares."